A Big Week for AT&T

Early in the week, AT&T announced plans to introduce, by the end of the year, an internet-video service called DirecTV Now that will stream 100+ live channels to TVs and mobile devices.

On Friday, it was reported that the media-telecom giant with over 25 million pay-tv and 129 million wireless subscribers is in advanced merger talks with Time Warner, owner of TV networks such as HBO and CNN.  The motivation for the merger is to get the one thing it doesn’t have and its major pay-TV/broadband competitor in many geographical markets, Comcast, does have – CONTENT.   As a video distributor and content owner, AT&T would leverage its position in the supply chain.  Certainly, regulators in their review of a proposed merger, will weigh the efficiency gains with the anti-competitive concerns of foreclosure.  No guarantee [at all] the merger would pass that regulatory review.

And then there is the question of how competitors like Charter. Verizon, and Dish will respond.

Up and Up!

Yesterday, the FCC released its annual report on average rates that cable operators charge for delivery of basic service, programming, and equipment.  In spite of cable cutting and shaving, and increased competition from alternative video delivery devices, cable rates are UP.  The main culprits, once again, are significantly higher programming costs and retransmission fees for broadcast stations.

Here’s a snapshot:

Price comparison of basic service and the most popular tier of cable programming in 2014.

Price comparison of basic service and the most popular tier of cable programming in 2014.

	Monthly Price	Change from 2013	Price/channel
All systems	$69.03	2.7% increase	$0.456
Systems with Effective Competition*	$70.31	2.0% increase	$0.412
Systems without Effective Competition	$67.85	3.3% increase	$0.497

*2/3^rd of all findings of effective competition include DBS (characterized by larger systems with more channels)

Between 2013 and 2014, the Consumer Price Index declined by 0.1%, yet the average annual amount paid for retransmission by a cable system increased by more than 63% ($7.8M to $12.7M).

In 2004, we paid, on average, $43.04 for 70.5 channels.  Ten years later, we had access to 2.5 times more channels (70.5 to 181+).  Over that same period, the compound average annual rate of change in the price of expanded cable was 4.8% (compared to 2% for the overall CPI).  

Here’s the full report: http://transition.fcc.gov/Daily_Releases/Daily_Business/2016/db1012/DA-16-1166A1.pdf

State rights are upheld

Today, the U.S. Court of  Appeals (6th Circuit) ruled that the FCC does not  have the preemptive authority, under the 1996 Telecom Act, to block state statutory  provisions that restrict or prohibit the expansion of municipal broadband into underserved nearby communities.

While the Court acknowledged the public benefits of expanding high-speed broadband, it reversed the FCC's order concluding that the federal regulatory body does not have the authority to reallocate decision-making on this issue from the state to its municipalities.

http://www.opn.ca6.uscourts.gov/opinions.pdf/16a0189p-06.pdf

The yin and yang of giving consumers what they want

All in one week!

On Wednesday (8/3), Dish Network announced that it had reached a multi-year retransmission agreement with the NFL that ended its 6-week blackout of the NFL Network and the NFL RedZone to its subscribers. 

On Friday (85), it launched a skinny bundle (Flex Pack) that is marketed to subscribers as “Don’t Watch, Don’t Pay.”  The core package includes 50-channels like AMC, TNT, USA, and CNN.  The add-on channel packs, ranging in price from $6 to $10 per month, cover niche interests like variety, kids, action, and news.  The NFL channels are not included in any of the current channel packs.

http://www.businesswire.com/news/home/20160804005782/en/

COMPETITION IS GOOD, BUT THERE IS THE LAW

The FCC’s goal of promoting competition and choice in the set-top box market hit a roadblock in the past few days.  While the “unlock the box” proposal has been criticized for months by cable operators whose vested interest is to maintain the monthly rental fees collected from cable subscribers, the US Copyright Office, in a letter to members of Congress, raised concerns about the potential for copyright law and policy violations if the Proposed Rule was implemented as described in the NPRM.*  Specifically, the Copyright Office said that the Proposed Rule "could interfere with copyright owners' rights to license their works as provided by copyright law, and restrict their ability to impose reasonable conditions on the use of those works through private negations."  

https://www.publicknowledge.org/assets/uploads/documents/CO_set-top_letter_%281%29.pdf

Let’s see how regulators, consumer groups, and industry participants respond.

A look back and forward

20-years after the Telecom Act of 1996, cable and wireline telecom providers seem to be retreating from their enthusiastic entries into each other’s markets.  Verizon’s FiOS is available in highly-populated areas in just 9-states.  AT&T U-Verse is in 21 states, but with its 2015 purchase of the satellite-provider, DirecTV, it seems to be pivoting away from a commitment to wireline technology. (See #s below).  Meanwhile, cable providers’ ability to sign-up telecommunications subscribers (even in bundles) lags behind its other offerings. 

But, by providing consumers with a choice of alternative access technologies, wireline vs. mobile, cable and telecom firms may compete more effectively in broadband in significantly more markets than they ever did before. 

Pay-TV	1Q2014	1Q2015	1Q2016	2015-2014	2015-2016
Cable	50,418,063	49,220,333	49,113,576	(1,197,730)	(106,757)
Satellite	34,362,000	34,256,000	33,986,000	(106,000)	(270,000)
Verizon FiOS	5,319,000	5,739,000	5,863,000	420,000	124,000
AT&T U-verse	5,661,000	5,993,000	5,260,000	332,000	(733,000)
TOTAL	95,760,063	95,208,333	94,222,576	(551,730)	(985,757)
Broadband	1Q2014	1Q2015	1Q2016	2015-2014	2015-2016
Cable	50,310,968	52,963,179	56,334,724	2,652,211	3,371,545
Verizon FiOS	9,031,000	9,246,000	9,218,000	215,000	(28,000)
AT&T U-verse	16,503,000	16,097,000	15,764,000	(406,000)	(333,000)
Other Telco	9,701,938	10,199,978	10,220,323	498,040	20,345
TOTAL	85,546,906	88,506,157	91,537,047	2,959,251	3,030,890
Source: Leichtman Research Group
http://www.leichtmanresearch.com/press/pr_archives.html

The Game of Negotiating Retransmission Agreements

It’s been nearly 6-weeks since DISH blacked-out Tribune Broadcasting’s WGN America network and its 42 owned or operated stations to its 5-million subscribers in 33 markets because of the inability of the two parties to agree to new pricing terms for retransmission. 

First move was by Tribune which launched a media blitz (with website) “informing” subscribers of the impasse and suggesting they take action, such as switching to another satellite/cable provider.  

DISH countered in two ways.  On June 16^th, it requested that Tribune agree to binding baseball-style arbitration to resolve the dispute.  A few days later, on June 20^th, it filed a lawsuit against Tribune in the U.S. District Court in Colorado seeking monetary damages associated with increased expenditures, drop in revenue, and loss in goodwill and reputation. https://consumermediallc.files.wordpress.com/2016/06/1-main.pdf

Tribune moved next by offering to extend the terms of the old contract to August 31^st while requesting the FCC to monitor “good faith” negotiations.  It moved again, this time on July 20^th, with an offer to extend the termination date to September 15^th, with no true-up or retroactive payments required as long as access was restored immediately.

On an investor call on July 22^nd, however, Charles Ergen, DISH CEO, stated that the satellite provider was “prepared to live without Tribune and WGN America”.   What about its dispute with the NFL Network too?  With 281,000 (2%) lost subscribers in the second quarter and football season fast approaching, what makes a strategic negotiating bluff turn into a huge mistake for the firm?